For more than a decade now, federal lawmakers have been struggling to reach consensus on a national policy concerning climate change. In that time, the focus of the debate has shifted from scientific questions surrounding global warming to policy questions of how to practically address it.
In 1992, the United States actively participated in the "Earth Summit," held in Rio de Janeiro, concerning global warming. The Earth Summit reflected an emerging scientific consensus that emissions of greenhouse gases (GHGs) – carbon dioxide, methane, nitrous oxide, hydrofluorocarbons, perfluorocarbons, and sulphur hexafluoride – contribute to climate change. At the Earth Summit, the United States and other nations approved the United Nations Framework Convention on Climate Change, which set nonbinding emissions targets for developed countries in an attempt to stabilize global emissions at 1990 levels. The framework, an international "first step," was ratified by the U.S. Senate and remains in effect today.
Subsequently, efforts to set binding GHG emissions targets have been less successful and, in fact, have served to divide the United States from the international community. In 1997, many of the nations that had attended the Earth Summit approved the Kyoto Protocol, and over 100 countries have since ratified it. The Kyoto Protocol sets binding emissions targets for industrialized (but not developing) countries, and would require United States industries to reduce or purchase offsetting credits for GHG emissions sufficient to achieve the equivalent to an 8% reduction below 1990 levels. The Kyoto Protocol never garnered support in the Senate, and the Bush Administration formally repudiated it in 2001.
Since 1997, climate change has been a hot topic on Capitol Hill. Lawmakers have focused primarily on economic impacts of proposed legislation on specific industries, and on the ability of U.S. companies to compete with those in nations potentially subject to less stringent emissions limits. As the United States continues to debate the issue, countries in the European Union and other nations have moved forward in developing their own regulations and standards to implement the Kyoto Protocol. U.S. companies have tracked these new international technology standards, and their potential costs, as they ultimately may be considered, under Clean Air Act regulations, in defining reasonably available control technologies for GHG emissions. States, too, are bringing pressure to bear; several have joined in challenging the Environmental Protection Agency’s (EPA’s) failure to regulate carbon dioxide under the Clean Air Act.
With international and domestic pressure mounting, it may only be a matter of time before new federal legislation is adopted. Two new bills, both of which enjoy bipartisan support, currently are pending before the Senate. Both would impose mandatory GHG emissions reductions based on absolute standards, implemented through traditional cap and trade programs. Last month, the Bush Administration unveiled its own alternative proposal. Contrary to the bills under consideration in the Senate, the Administration’s proposal would establish voluntary emissions reductions that would vary in proportion to annual fluctuations in economic output. This advisory examines and compares each of these federal initiatives.
Clean Power Act
In February, Senator Jim Jeffords (I-VT) and 19 bipartisan co-sponsors introduced the Clean Power Act of 2003 (S. 366). The Clean Power Act is designed to reduce power-plant emissions of carbon dioxide, as well as certain other air emissions correlated to adverse environmental and public-health consequences.
The Clean Power Act targets emissions from the nation’s power plants, based on the premise that certain electric-generating facilities substantially contribute to national sulfur dioxide, nitrogen oxides, carbon dioxide and mercury emissions. The electric-generating facilities covered under the proposed Act include those with "name plate" capacities of at least 15 megawatts (MW) that generate electricity for sale through combustion of fossil fuel. Thus, the Clean Power Act casts a broad net, applying to the vast majority of generating facilities that produce the nation’s power from fossil fuels. Baseline and "peaking" power supplies are expected to be equally affected, given the focus on "name plate" capacity, as distinct from run hours or an alternative operational measure. However, nuclear facilities and other generating facilities that do not rely on fossil fuel would not be covered by the Act.
If enacted as proposed, the Clean Power Act would limit emissions from covered power facilities starting in 2009 to the following quantities:
- 2.25 million tons of sulfur dioxide (an 81% reduction below 2000 levels);
- 1.51 million tons of nitrogen oxide (a 71% reduction below 2000 levels);
- 2.05 billion tons of carbon dioxide (a 21% reduction below 2000 levels); and
- 5 tons of mercury (a 90% reduction below 1999 levels).
These emissions reductions would be achieved through the distribution of emission allowances by EPA. EPA would allocate about two-thirds of the allowances to households and consumers, 20% to renewable energy and energy-efficient products, and the remainder to workers and communities adversely affected by the Act, as well as to certain carbon-dioxide projects. Initially, however, electric-generating facilities would receive an allocation of 10% of the emission allowances, to be distributed in proportion to the facilities’ output. This allocation would decline a percentage point per year until 2019. Emission allowances could be traded to and among electric-generating facilities pursuant to a trading compliance program that would be established by EPA.
Effects on fossil-fuel power producers, particularly coal-fired facilities, are expected to be dramatic. Thus, the proposed legislation has the ability to affect national power production, both with respect to reliability and electricity pricing. To that end, we expect the bill, presently before the Senate Committee on Environment and Public Works, to substantially evolve.
Climate Stewardship Act
Also under Senate committee review is the Climate Stewardship Act of 2003 (S. 139), another bipartisan effort led by powerful senators John McCain (R-AZ) and Joseph Lieberman (D-CT). Unlike the Clean Power Act, this bill specifically targets GHGs, but regulates other industry sectors in addition to electric-generating facilities. Specifically, the Climate Stewardship Act could apply to GHG sources in the electric power and transportation sectors, industrial plants and large commercial facilities. Analysts have suggested that the entities covered under the Climate Stewardship Act – mostly the transportation and energy sectors – are responsible for 70% of the United States’ GHG emissions.
Like the Clean Power Act, the Climate Stewardship Act employs a traditional cap-and- trade system for targeted pollutants. The Act would limit 2010 GHG emissions to year 2000 levels, and 2016 GHG emissions to year 1990 levels. Emission allowances would be distributed to covered sectors and to a public corporation established under the Act to operate as a clearing house for emissions allowances. This corporation, the Climate Change Credit Corporation, would use its allowances and proceeds from trading to reduce the costs of GHG reduction borne by consumers. Covered entities would have to submit one allowance for every ton of carbon dioxide (or carbon dioxide equivalent of other GHGs) they emit, refine, produce or import after 2010. Allowances could be bought, sold, banked for future use and even borrowed from future reductions. There would be no limit to the number of allowances that a company could obtain from other participants. Vehicle manufacturers would also be allowed to purchase emissions allowances to submit in exchange for vehicles that exceed corporate average fuel economy by more than 20%. Additionally, a covered entity could select "alternative compliance" options, such as sequestration projects, international reductions and verified reductions made by entities not covered by the Act to satisfy up to 15% of its total allowance submission.
Certain analysts have forecasted that unregulated GHG emissions will increase to 6.2 billion metric tons in 2010 and 7.5 billion metric tons in 2020. Comparatively, the proposed reductions in the Climate Stewardship Act, i.e., of 860 million metric tons of carbon dioxide reductions (14% of forecast emissions) in 2010 and 2.9 billion metric tons of carbon dioxide reductions (39% of forecast emissions) in 2020, are ambitious goals. While they are consistent with the United States’ Rio treaty commitment to stabilize GHG emissions at 1990 levels, these goals nonetheless fall short of the estimated two billion metric ton reduction that the Kyoto Protocol would have required by 2010, effectively ensuring that the international debate on GHGs will continue. As notably, the Climate Stewardship Act is considerably more aggressive than the Bush Administration’s recent proposal, discussed below, which targets an 18% improvement in GHG emissions – 350 million metric tons – by 2012.
Introducing the bill on the Senate floor, Senator Lieberman heralded the cap-and-trade approach as more flexible than traditional command-and-control legislation, and capable of "unleash[ing] the genius of American enterprise" to drive down emissions in innovative and cost-effective ways. Senator Lieberman predicted that the competition among companies for emission reduction technology will create a "boomlet" of new high-paying jobs.
In terms of cost, EPA has suggested that compliance with the Climate Stewardship Act through 2016 could be realized for $14 per ton of carbon dioxide, which amounts to about $9 billion annually. While $9 billion dollars is a mere fraction of our $12 trillion dollar economy forecast for 2010, EPA estimates that the cost of purchasing emission reductions allowances at $14 per ton would raise the cost of gasoline by 9% (raising the national average price of $1.45 per gallon by 13 cents), the cost of natural gas by 20% (raising the national average price of $3.78 per thousand cubic feet by 77 cents), and the cost of using coal by 100% (effectively doubling the current national average price of $33 per short ton). In an era of increasing costs, this may mean the death knell for the proposed legislation. At very least, we would expect a heated ongoing debate in the Senate Subcommittee on Environment and Public Works, where the measure currently is pending.
Climate VISION
Last month, the Bush Administration announced its own initiative addressing GHG emissions. Contrary to the mandatory reductions proposed in the Senate’s pending bills, this initiative relies on a voluntary public-private partnership to pursue reductions in the projected growth in GHG emissions. Climate VISION (for "Voluntary Innovative Sector Initiatives: Opportunities Now") implements the President’s target by reducing "greenhouse gas intensity" – the ratio of emissions to economic output – by 18% over the next 10 years. The initiative relies on voluntary emissions reductions and tax incentives aimed at reducing GHGs without harming economic growth.
The approach has been praised by industry leaders. Twelve major industrial sectors participating in Climate VISION have voluntarily set goals for reducing GHG intensity. For example, Edison Electric Institute and other power-sector groups, representing the vast majority of United States power producers, have announced that they will pledge to reduce the power sector’s contribution to carbon dioxide intensity by 3% to 5% by 2012. The power sector also proposes to increase its energy efficiency by expanding natural gas, clean coal and nuclear generation; increasing investments in wind and biomass projects; and promoting energy-efficiency and demand-side programs, forestry initiatives, methane recovery projects and international partnerships. Similarly, the American Petroleum Institute, representing a majority of national petroleum-refiners, will endeavor to increase efficiency of members’ refineries by 10% by 2012. And the Business Roundtable, an association of 150 companies across various sectors that collectively generate one-third of the country’s gross domestic product, has announced that its members will participate in the effort to reduce GHG intensity.
Notwithstanding these and other industry pledges, critics are numerous and vociferous. Most contend that Climate VISION does not guarantee absolute reductions in GHGs or ensure industry accountability. Additionally, certain opponents contend that, by targeting GHG intensity instead of absolute emissions, Climate VISION will not reduce the United States’ estimated contribution to global GHG emissions. Particularly contentious was the criticism of Margot Wallström, the European Union’s Commissioner for the Environment, which underscored the European Union’s determination to implement stringent standards for "best available technology," including those potentially applicable to United States companies.
Conclusion
If the 108th Congress passes either mandatory cap-and-trade bill, industry sectors – especially the power sector – would be forced to reduce a greater quantity of GHG emissions in a shorter period of time than the targets set forth in the Bush Administration’s voluntary initiative. Even if Congress does not enact mandatory reductions, international standards are expected to continue to influence national GHG initiatives, including the definition of best available technology as required of new emission sources. While this debate has just begun, it continues to represent a critical factor in the balance between power production and air quality, with likely costs to the industry and American consumers.
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